Social Security isn't enough to support you in retirement, so you're going to need money saved to produce the additional income you need. It can be hard to amass a large enough nest egg unless you're investing and putting your money to work for you.
Unfortunately, millions of Americans are missing out on a crucial piece of knowledge they need to make the right retirement investments. And this could have huge financial consequences.
Every American needs this investing knowledge for a secure retirement
One of the most important things that you need to know when saving for retirement is how to allocate your assets. Unfortunately, a study from the Transamerica Center for Retirement Studies revealed that far too many people aren't sure how to do that. In fact, the research showed just 31% of workers have either a great deal or quite a bit of understanding about what asset allocation is and how it works.
So, what is asset allocation exactly? It refers to building a diverse portfolio of different asset classes so you are exposed to an appropriate level of risk.
See, there tends to be an inverse relationship between risk and potential rewards. A high-risk investment can generally produce a better return on investment (ROI) if things go well -- but it comes with an increased chance of losing your money. Think betting it all on black on the roulette wheel, or putting a lot of money into an untested pharmaceutical company in the hopes that a promising cure it is working on pans out.
On the other hand, investments that come with a lower risk generally have a lower rate of return since investors don't need the potential for a high payoff to be convinced to buy a safe asset where they're unlikely to lose money.
Investors must make sure they are exposed to an appropriate level of risk given their tolerance for losses. And lots of factors affect that, including each person's comfort level with seeing their portfolio balance fall, as well as their timeline for when they will need the money. Since asset allocation can be complicated, it's not a surprise that under 1/3 of workers don't really understand it.
What can you do if you aren't sure how to allocate your assets?
The best thing to do if you don't understand asset allocation is to learn about it. This is doable even if you don't have a ton of investment knowledge.
To get started, you'll want to research the risks and potential rewards of different asset classes such as equities, fixed income investments, and cash and cash equivalents. Then think about how to divide your invested funds among them based on your age and the amount you're comfortable losing if things don't go as planned. You could also follow a simple rule of thumb that says you should subtract your age from 110 and put that percentage of your portfolio into equities while allocating the rest into safer fixed-income investments.
You can also buy a target date fund. With this approach, you buy a fund based on when you'll need to start withdrawing from your investment account. Your money is then allocated appropriately into a mix of different assets based on your investing timeline. With a target date fund, you don't need any understanding of asset allocation at all to get the right investment mix -- but you can expect to pay higher fees than if you built your portfolio yourself.
Ultimately, it's up to you if you want to learn about asset allocation or not. But if you're managing your own portfolio rather than opting for a target date fund, you have a responsibility to yourself to acquire this knowledge so you can get the right investment mix.